ISLAMABAD: The newly formed Tax Reforms Commission — a joint venture of two state-run and private think tanks — on Monday called for a stable and predictable tax regime through simplification and harmonisation of the tax system instead of arbitrary budgetary measures targeted at revenue enhancement, to facilitate taxpayers and tax payments and build government trust.

A joint report prepared by the commission comprising economists nominated by the state-run Pakistan Institute of Development Economics (PIDE) and the Policy Research Institute of Market Economy (PRIME) said the lenders prioritised revenue collection over growth and employment, but there were several flaws in the existing tax system.

“It is neither citizen-friendly, transparent, stable, nor predictable”, said the commission. Faced with increasing budgetary difficulties, reliance on ad-hoc measures has grown, leading to arbitrary withholding income taxes, turnover taxes, taxes on deemed incomes, and arbitrary revisions of tax rates, it added and claimed that approximately 68pc of revenue was collected through excessive use of withholding and minimum tax regimes.

At the same time, the fragmented tax system, with numerous exemptions and rates, was creating complexity and confusion for taxpayers. “Problems include a broken refund system, high compliance costs, and a predatory tax authority”.

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The budget period is marked by extreme uncertainty and speculation due to this approach to taxation. This arbitrary approach has resulted in numerous court cases and reversals of initiatives. “More taxes are not the solution to deep structural fiscal policy issues where expenditure control is not possible”, the commission said.

The commission recommended simplification and harmonisation of the tax system to facilitate taxpayers and ease tax payments, which was more effective than arbitrary measures imposed annually. “Eliminating categories such as filer/non-filer and registered/unregistered for sales tax alone would compensate for many arbitrary tax measures”.

It also called for reducing reliance on revenue collection through tariffs, additional customs duties, and other arbitrary measures, saying this had eroded confidence and closed the economy, leading to declining investment and growth. “Long-term goals should include openness with low tariffs, not arbitrarily disturbed by any government”.

Moreover, automation and digitisation should be priority to eliminate direct interaction between taxpayers and the tax authority. “Transparency and digitisation are key for tax administration, along with necessary changes in human capital and FBR service organisation”.

The commission said it had worked tirelessly to ensure that the proposed reforms did not result in revenue loss but would lead to revenue growth. The proposed policy relies on simplification, harmonisation, and improved FBR administration through digitisation. “Conservative estimates suggest direct revenue gains of at least Rs4 trillion in the first three years, with significant benefits to the economy in terms of higher investment, growth, and job creation”, it claimed.

The report said that decreasing tariffs had shown positive impacts on revenues and substantial reductions in smuggling and mis-invoicing. It called for zero-rated imports of plant and machinery, industrial raw materials, and intermediate goods.

The think tanks also called for firm implementation of “the decades-old GST/VAT agenda”. Problems with sales tax registration, harmonisation, digitisation, and the refund system should be resolved this year.

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Key reforms also include harmonisation of GST/VAT and no new exemptions on GST except in areas such as education and health. A fully functional GST/VAT system must be a performance goal for FBR with consequences. “With a good GST in place, we should consider lowering the rate”, it said, pointing out that countries like India, Georgia, and Mexico had shifted from high GST (17-19pc) to VAT with a low rate (7-10pc) and experienced an immediate positive impact on the tax-to-GDP ratio by 3-4pc.

More importantly, the report suggested that “taxing all incomes equally and facilitating corporatisation is crucial,” adding that no new exemptions should be added to the income tax system. For equity reasons, the marginal income tax should increase, but the effective income tax of AOPs and individuals should be lower than the corporate income tax to incentivise corporatisation.

The commission proposed new income tax slabs while suggesting decreased effective tax rates. For example, on an annual income of Rs3.6 million, the effective tax rate should be reduced from 12pc to 6.38pc.

It also recommended withdrawing deemed rental income tax, uniformity of the tax regime on all sources of personal and non-corporate incomes, including agricultural income, and decreasing the corporate tax rate to 25pc, besides removal of CVT, super tax, turnover tax, and presumptive/final tax, and restoration of investment credits for plant and machinery.

Published in Dawn, June 11th, 2024